EQT Corporation Stock: Blue Light Promotions Ended (NYSE:EQT)

EQT (NYSE: EQT) management has indicated that it is not buying at current market prices. This company made two major acquisitions before the market realized that a rise in oil and gas prices was underway. Management believes that these acquisitions have gone up in value (and I tend to agree). But management also feels prices are now out of the discount range they like to buy. Consequently, the acquisition option has ceased.

It’s an interesting position by very savvy management. Offers are still ongoing. But investors now think these deals can get expensive. Investors pay management to bring them good deals. Very few management take the time to ensure that the deal truly benefits shareholders.

There is an “exit” in this industry due to the “cost or lower market” calculation that accompanies the accounting choice that many of these companies make. So management can overpay for an acquisition and then write off that overpayment in the next recession because “prices have forced depreciation.”

The only way for investors to spot an overpayment is to calculate average returns throughout the business cycle while monitoring the cash flow statement for decent cash flow from investments made. Management is well aware that the market often “follows the Joneses” rather than relying on good fundamental work to close a good deal. The effects of good management often manifest themselves in the long term because some management is very good at giving the market what it wants in the short term to drive up the share price.

One of the things that EQT management pointed out on the conference call was that they don’t like to pay for Tier 2 acreage. Obviously, that means a lot of speculative acreage ( or at least less than prime area) came “free” or very cheaply. Otherwise, management wasn’t going to do the job. The Company’s shareholders will therefore benefit from any upside potential on this Tier 2 acreage in the current environment. The huge consideration is that if the square footage is disappointing, it didn’t cost anything to acquire in the first place.

Compare to Chesapeake Energy

Chesapeake Energy (CHK) recently emerged from bankruptcy with post-bankruptcy management and all the turmoil that comes with it. The challenge is that post-bankruptcy management may not have the experience that EQT’s long-term industrial management has. This may be more apparent to investors during the next industry downturn.

Chesapeake Energy recently acquired the following for approximately $2 billion plus 9.44 million shares of common stock in the company. This rather large acquisition seems cheap at first glance. However, the calculations presented above are before the coverage calculations. Current prices are well above prices at the time EQT made its acquisitions. The assumptions for the future are likely to be much more optimistic than when EQT made its purchases.

Importantly, the ROR posted for $2.50 is actually quite low when considering natural gas prices from previous years.

The major acquisitions made have enabled EQT to reduce corporate costs after the acquisitions. These costs are lower than many competitors before progress management is currently reporting. EQT is a very large company even before the acquisitions. Therefore, the new costs that combine in the average cost of the company must be significantly lower (and material as well) to reduce the overall costs of the company. Clearly, new wells contribute to cost reduction and are likely to be more profitable than the rate of return posted by the Chesapeake Energy acquisition.

Both companies have made “bolt-on” acquisitions that are expected to create synergies to reduce costs. The difference is that EQT management was looking for bargains in 2020 and 2021 before the market realized that the situation for oil and natural gas was improving. But Chesapeake Energy management is taking advantage of the current enthusiasm for the industry by making “cheap acquisitions” at a time when prices and prospects are much more optimistic.

Many managements do not include the cost of acreage when disclosing to shareholders the clearing price of their wells. Chesapeake Energy is likely to have a much higher acreage cost that is not disclosed to shareholders than is the case for EQT Corporation. This will result in lower average profitability throughout Chesapeake Energy’s full business cycle as well as reduced cash flow per investment amount.

It is sometimes difficult for shareholders to discern this difference because it covers the entire economic cycle. Sometimes it takes a while for excessive “lower cost or market” adjustments to become apparent to the market. Sooner or later, above-average performance becomes evident to the market.

Conclusion

EQT management has clearly accomplished a lot in the short time they have run the business. Much of the achievement was on the cost side, as this was the easiest to tackle and the results would be immediate. Now, there are finally long-term transportation agreements that are expiring and can be rearranged to move natural gas to better markets outside the basin.

Price improvement will take some time as sales agreements are often long term. However, these benefits are likely to become apparent to shareholders simply because of the significantly better prices available in the market.

Natural gas prices have recently reached levels rarely seen (let alone levels rarely seen in late winter). This is partly due to the increased ability of the North American industry to export natural gas products. This capacity should continue to increase, allowing North American natural gas prices to reflect much higher world prices than in the past.

In addition, management has acquired an area that would allow for greater production of liquids. Therefore, the business can thrive in a wider variety of industrial conditions in the future. In the meantime, the industry-leading cost structure should allow for decent profitability while management sorts out the sales situation.

This business will not have to increase production to increase cash flow and profits. Management faces many issues that will produce better results over time.

Current industry conditions will allow for both deleveraging and share buybacks when management feels comfortable initiating shareholder return policies. In the meantime, shareholders can expect improved earnings throughout the economic cycle to lead to a better share price than in the past.

Good management is often the most important asset that does not appear on the balance sheet. This management treated shareholders very well when they sold their business to EQT some time ago. Shareholders can probably expect another round of “good treatment” from this management in the future. Good management tends to surprise from above. There will probably be a lot of good surprises in the future.